Health FSA Forfeitures

[Chaz]

Can an employer use health FSA forfeitures to defray administrative expenses of other ERISA benefits (for example among many, pay heath plan TPA fees) without violating ERISA's "exclusive benefit" rule if the heath FSA and the other ERISA benefits are part of one ERISA "wrap plan"?  Assume that the plan document so provides and that the employer keeps all FSA and other employee contributions in its general assets in accordance with DOL guidance.  Also assume that there are different participants in each of the employer's ERISA benefits.

Thanks!

[Brian Gilmore]

My position is the health FSA experience gains from forfeitures cannot be used to fund the administrative expenses for another benefit, such as the health plan, dependent care FSA, wellness program, lifestyle spending account, or commuter benefits.  Employers have a fiduciary duty under ERISA to act solely in the best interest of plan participants and beneficiaries.  Applying experience gains to other benefits would breach that exclusive benefit rule because not all health FSA participants would be participants in those other benefits, and therefore the funds would not be used for the health FSA participants' exclusive benefit.

I don't think the fact that the health FSA and health plan are components of the same umbrella mega wrap 501 in your situation makes any substantive difference for this purpose.

ERISA §404(a)(1)(A):

(a) Prudent man standard of care.
(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan.

[Luke Bailey]

This is the first time I've ever disagreed with Brian Gilmore, but although it depends to some extent on the plan documents, I think the forfeitures can be used for admin expenses across the entire plan, except perhaps for the DCAP. ERISA applies to plans, not to benefits within a plan. Note that the last word in Brian Gilmore's quote from ERISA sec. 404(a) above refers to the expenses of the "plan." Where you have a proper wrap document, the plan is the entire wrapped plan, except, again, perhaps for the DCAP, since that is not an ERISA welfare benefit.

[Brian Gilmore]

Hey Luke, good to hear from you.  Yes the fun ones are where it's more gray and some room for reasonable disagreement.  I take your point, and I've definitely heard others take that position.  

The reason I disagree is I think the exclusive benefit rule here is intended to target the specific benefit component.  How employers draw lines on where one ERISA plan starts and the other ends--particularly in the H&W context--is somewhat arbitrary.  Most employers now just have a mega wrap umbrella plan 501 for all H&W benefit components subject to ERISA.  That's a more recent phenomenon that wouldn't have been contemplated by Congress in 1974.

I don't think Congress or the DOL would intend for employers to share a DB plan pension overfunding with a DC plan participants if the retirement world had components all wrapped into a plan 001 in the same way.  By analogy, I don't think you're operating for the exclusive benefit of health FSA participants when you apply your experience gains from forfeitures to fund a dental benefit enhancement, infertility HRA claims, EAP counselling, etc., particularly in light of the fact that there will never be perfect overlap in participation with the two benefits. 

[Luke Bailey]

3 hours ago, Brian Gilmore said:

I think the exclusive benefit rule here is intended to target the specific benefit component

Brian, do you have a cite for that?

3 hours ago, Brian Gilmore said:

I don't think Congress or the DOL would intend for employers to share a DB plan pension overfunding with a DC plan participants if the retirement world had components all wrapped into a plan 001 in the same way.

Brian, you could not combine a DB with a DC. Breaks the rules under 414(l).

You can merge DB's with other DB's (subject to certain funding protections for the participants in the better-funded plan) and DC's with DC's (where the account nature of the plan provides built-in protection), and where you do, e.g. with DC's, you do not have to restrict one merger constituent's forfeitures to use for the participants of that constituent.

[Brian Gilmore]

Luke--the best cite is ERISA §404(a)(1)(A) and what was likely intended by the exclusive benefit rule by reference to a "plan".  Plus how it's likely to be enforced by the DOL.  Just as you don't have an explicit cite for saying it's permitted, neither do I for explicitly saying it's prohibited. 

For an unrelated but useful cite I would point to the HIPAA special enrollment regulations.  They refer to "benefit packages" instead of "plans," with the understanding that a single ERISA plan isn't a useful concept for how modern benefits are structured:

29 CFR §2590.701-6(d):

Special enrollees must be offered all the benefit packages available to similarly situated individuals who enroll when first eligible. For this purpose, any difference in benefits or cost-sharing requirements for different individuals constitutes a different benefit package.

Agreed re DB and DC not actually being combinable--the point of the analogy was to imagine a world where all retirement benefits were housed under a single ERISA plan in the same manner as H&W plans.  That's theoretically possible under ERISA--the 414(l) limitations you refer to are under the Code.  In that hypothetical world wouldn't it strike you as rather aggressive to share forfeitures among the components even if they were under the same ERISA plan 001?

I think your point could be arguable in a litigation/enforcement context, but advising an employer for best practices is a different story.  Most employers are interested in avoiding that type of situation in the first place.  Allocating experience gains only to the participants of the actual benefit component is a pretty simple step to stay out of hot water.

[Luke Bailey]

Brian, agree to disagree?

[Peter Gulia]

While recognizing Brian Gilmore’s reasoning . . . .

To extend the analysis, are there situations for which a health flexible spending account’s provisions could (perhaps especially for a salary-reduction-only FSA) result in an experience loss?

Could an employer have an obligation to pay a benefit more than the “premiums” collected from or for the participant?

If that could happen, might it be fair for such an employer to absorb experience losses and enjoy experience gains?

[Brian Gilmore]

Yes, there can be net experience losses resulting from mid-year terminations with overspent accounts (per the health FSA uniform coverage rule).  In other words, those overspent mid-year term losses can exceed any forfeitures caused by the use-if-or-lose-it rule for a given plan year. 

However, that's not a basis for retaining net experience gains when the flip is true for a plan year (i.e., forfeitures exceed losses from overspent mid-year terms).  That's just the simple risk-shifting aspect of the benefit.

The cafeteria plan regs outline the possible applications of FSA experience gains from forfeitures. The option for the employer to retain the experience gains is on the table for the dependent care FSA (non-ERISA) but not the health FSA (ERISA) for the reasons discussed above re the exclusive benefit rule.

Prop. Treas. Reg. §1.125-5(o):

(o) FSA experience gains or forfeitures.

(1) Experience gains in general. An FSA experience gain (sometimes referred to as forfeitures in the use-or-lose rule in paragraph (c) in this section) with respect to a plan year (plus any grace period following the end of a plan year described in paragraph (e) in §1.125-1), equals the amount of the employer contributions, including salary reduction contributions, and after-tax employee contributions to the FSA minus the FSA’s total claims reimbursements for the year. Experience gains (or forfeitures) may be—

(i) Retained by the employer maintaining the cafeteria plan; or

(ii) If not retained by the employer, may be used only in one or more of the following ways—

(A) To reduce required salary reduction amounts for the immediately following plan year, on a reasonable and uniform basis, as described in paragraph (o)(2) of this section;

(B) Returned to the employees on a reasonable and uniform basis, as described in paragraph (o)(2) of this section; or

(C) To defray expenses to administer the cafeteria plan.

[Luke Bailey]

8 hours ago, Brian Gilmore said:

Experience gains (or forfeitures) may be—

(i) Retained by the employer maintaining the cafeteria plan;

Brian and Peter, I had reviewed the same reg in connection with my argument that the exclusive benefit rule would apply to the plan as a whole, not to benefits within the plan, and when I did I was struck by the portion that I have excerpted above, but decided not to muddy the waters. Doesn't it say that the employer can just keep the excess? If that's the case, then how the heck does that satisfy exclusive benefit?

[Brian Gilmore]

17 hours ago, Brian Gilmore said:

The cafeteria plan regs outline the possible applications of FSA experience gains from forfeitures. The option for the employer to retain the experience gains is on the table for the dependent care FSA (non-ERISA) but not the health FSA (ERISA) for the reasons discussed above re the exclusive benefit rule.

The cafeteria plan regs issued by IRS/Treasury don't address the fiduciary duties that also apply to a benefit subject to ERISA.  Just because something is permitted by the Code doesn't mean it's permitted by ERISA. 

[Peter Gulia]

It’s easy to concur with the idea that the Treasury department’s proposed interpretation of Internal Revenue Code of 1986 § 125 is not, and even if made final would not be, binding authority to interpret part 4 of subtitle B of title I of the Employee Retirement Income Security Act of 1974.

About cafeteria plans, fiduciaries and practitioners are accustomed to the Labor department’s non-enforcement of ERISA § 403’s command to hold plan assets in trust.  Yet, consider the last paragraph of DOL Enforcement Policy for Welfare Plans with Participant Contributions, Technical Release No. 1992-01 (May 28, 1992):

The Department cautions that the foregoing [non]enforcement policy in no way relieves plan sponsors and fiduciaries of their obligation to ensure that participant contributions are applied only to the payment of benefits and reasonable administrative expenses of the plan.  Utilization of participant contributions for any other purpose may result not only in civil sanctions under Title I of ERISA but also criminal sanctions under 18 U.S.C. [§] 664 [and other crimes].  See U.S. v. Grizzle, 933 F.2d 943 (11th Cir. 1991).  https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/92-01

But it leaves open the question, exactly what is “the plan”?

Is it narrowly just the health flexible spending account?  (Brian Gilmore presents a useful reasoning for that view.  Other analyses are possible.)

Is it just those of a welfare plan’s benefit structures classified as health benefits?

Or is it the whole of a welfare plan, including welfare benefits beyond health benefits?

If one follows Brian Gilmore’s reasoning (or the health FSA is the employer’s only welfare benefit), what steps might a fiduciary take if, for a year, health FSA experience gains exceed the expenses of administering the health FSA?

Might the employer/administrator set up a reserve to be used to meet future years’ experience losses or plan-administration expenses?

Must such a reserve be a formal trust?  Or may it be a quasi-trust accounting entry in the employer’s financial statements or other records?

[Luke Bailey]

1 hour ago, Peter Gulia said:

It’s easy to concur with the idea that the Treasury department’s proposed interpretation of Internal Revenue Code of 1986 § 125 is not, and even if made final would not be, binding authority to interpret part 4 of subtitle B of title I of the Employee Retirement Income Security Act of 1974.

Peter, sure. DOL is not in any way bound by what IRS says. But at least we know the IRS would not have a problem with it, and hey, where are DOL's 125 plan regs, even proposed?

BTW, from a conceptual standpoint, a 125 plan is not, and I don't think this is controversial, an ERISA plan at all. It is a tax gimmick that houses parts of the employer's ERISA welfare benefit plan (if there's a wrap plan). In the old days, you would see 125 plans that would call its different segments "plans," e.g. an "uninsured medical expense reimbursement plan" would be listed as one of the benefits housed in the 125 "plan."

 

[Peter Gulia]

Yup.  I’m aware of the view that an IRC § 125 cafeteria plan is a means for excluding something from a participant’s gross income for Federal income tax purposes, and (at least in that sense) is not itself a pension or welfare employee-benefit plan within the meaning of ERISA § 3(3).

But IRC § 125(a) recognizes a cafeteria plan’s “participant may choose among the benefits of the plan.”  And if a health flexible spending account is such a benefit, it seems that the benefit somehow involves an employee-benefit plan (whether separately stated or integrated with the writing that states the cafeteria plan).  Else, what person provides the benefit, and by what means does some person provide it?

Further, the Labor department’s Technical Release assumes that § 125 wage reductions exchanged for a welfare benefit are “participant contributions” and “plan assets”.

While some might feel the Labor department ought to have published guidance, they didn’t.  Sometimes, we get to be lawyers, and can form our own interpretations (unconstrained by an administrative-law document).

That said, I don’t yet know how I would answer the questions.

[Chaz]

This is a great discussion.  Thank you all for your (differing) viewpoints.

[Brian Gilmore]

Right--the cafeteria plan itself is just a safe harbor from constructive receipt.  For example, a simple POP is not an ERISA plan.  Nor is a dependent care FSA because it does not provide any of the benefits outlined in ERISA §3(1).  So there's no reason for the DOL to be issuing regs under §125.  We're actually 15 years into waiting for the IRS to finalize most of theirs.

But the DOL has confirmed that a health FSA component of a Section 125 cafeteria plan is a an ERISA welfare benefit plan (for purposes of COBRA, HIPAA, ACA, etc.) because it is a group health plan by virtue of reimbursing medical expenses.  Just like the medical, dental, and vision plans that employees pay for on a pre-tax basis through the POP are an ERISA plan.

Here's an example in the ACA context:

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03

Question 7: How do the market reforms apply to a health FSA that does not qualify as excepted benefits?

Answer 7: The market reforms do not apply to a group health plan in relation to its provision of benefits that are excepted benefits. Health FSAs are group health plans but will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant’s salary reduction election for the health FSA for the year (or, if greater, cannot exceed $500 plus the amount of the participant’s salary reduction election). (8) See 26 C.F.R. §54.9831-1(c)(3)(v), 29 C.F.R. §2590.732(c)(3)(v), and 45 C.F.R. § 146.145(c)(3)(v). Therefore, a health FSA that is considered to provide only excepted benefits is not subject to the market reforms.

If an employer provides a health FSA that does not qualify as excepted benefits, the health FSA generally is subject to the market reforms, including the preventive services requirements. Because a health FSA that is not excepted benefits is not integrated with a group health plan, it will fail to meet the preventive services requirements.

[Chaz]

I do not know whether this provides any more clarity on my original question but I thought the DOL's guidance on what plan sponsors can do with MLR rebates under the ACA might be helpful.  Sure enough, Technical Release 2011-04 contains the following paragraph:

Quote

"Where a plan provides benefits under multiple policies, the fiduciary should allocate or apply the plan's portion of a rebate for the benefit of participants and beneficiaries who are covered by the policy to which the rebate relates provided doing so would be prudent and solely in the interests of the plan according to the above analysis. However, the use of a rebate generated by one plan to benefit the participants of another plan would be a breach of the duty of loyalty to a plan's participants."

If we analogize "multiple policies" in this guidance to "different benefits," and if the DOL took the same philosophy with respect to health FSA forfeitures, it might say that only health FSA administrative expenses can be paid from health FSA forfeitures unless not prudent even if a health FSA is not a different "plan" than the other benefits in the wrap plan.

Then again, it might not.  I'm still stumped.

[Luke Bailey]

Brian and Chaz, I agree with both your points, and I guess what it may come down to is practicality and fairness.  You've got a health plan with an HMO and a PPO, with different carriers for some reason. The insurer behind the PPO does worse on its medical loss ratio, so the MLR rebates are higher for that benefit. Since the participants that chose the PPO suffered the most, it makes sense to allocate the larger MLR rebate only to them.

Does the same thing apply for an FSA? Participant A left w credit balance, so it's fairer to allocate that to participant B who is still employed and still in the FSA? Hmmh.

[Brian Gilmore]

If anyone is still interested in this one, I posted some more thoughts here: https://www.theabdteam.com/blog/fsa-experience-gains-from-forfeitures/

[Luke Bailey]

Brian, I think it's a useful explanation for employers. However, you seemed to acknowledge in the above interchange that reasonable minds might differ on the issue of using forfeitures in connection with other benefits within the one "plan," but on your website you're saying it's black and white. I just wanted to point that out, not get back into the discussion, because I think without guidance we're just going to keep repeating the same arguments.

[Peter Gulia]

For a service provider’s publication, especially on its website, one presents differently a response to a question of law that lacks an obvious spoon-fed answer.

A service provider must pretend it does not furnish tax or legal advice.  Yet, at the same time the service provider knows it is exposed to liability for (at least) a customer’s reliance on the service provider’s communication.  And no matter how clear, conspicuous, and intense the not-advice warnings are, a service provider’s customers (and other readers) rely on the communications.

Those concerns often lead a service provider to present an explanation closely supported by a public law source rather than something that calls for too much reasoning.  And for many employee-benefits points, the liability might be a smaller exposure and a lower probability if the answer is one readily tolerated by the government agencies.

An employer that gets no advice and follows such a communication might miss an opportunity, but is less likely to do something that causes a harm for which the tort of negligent communication (or, often more practically, a need to keep a customer) would provide a remedy.

Recognizing the context, Brian Gilmore’s blog page for Newport is strong for what’s feasible in a communication of that kind.

[Brian Gilmore]

Luke--I said it's "likely" a breach of the exclusive benefit rule to apply experience gains from forfeitures to another benefit.  I don't see that a black and white position.  It's my interpretation of the rule and my word of caution for employers who are generally always looking to adopt best practices that minimize potential liability.

Applying experience gains to other benefits would likely breach that exclusive benefit rule because not all health FSA participants would be participants in those other benefits, and therefore the funds would not be used for the health FSA participants’ exclusive benefit.

Peter--thanks, agreed.

[Luke Bailey]

I was just sayin'... Yeah, it's a very helpful article, no doubt about it. Maybe dark gray and light gray.